Speech by SEC Chairman:
A Single Capital Market in Europe:
Challenges for Global Companies

Remarks by

Chairman Harvey L. Pitt

U.S. Securities and Exchange Commission

Conference of the Institute of Chartered Accountants of England and Wales
Brussels, Belgium
October 10, 2002

These remarks reflect solely the personal views of Mr. Pitt, and do not necessarily reflect the views of the Commission, the individual members of the Commission, or its Staff.

Good afternoon. It's an honor and a pleasure to be with you today. The European Union is a crucial ally of the United States, an undisputed economic heavyweight that combines and exceeds the sum of its constituent parts, and a critical interlocutor in the development and regulation of international capital markets. The U.S. and the EU must work together towards mutual global objectives, and the SEC and its EU counterparts must work together to achieve strong transatlantic markets and regulation.

In the early 1980s, Alan Beller, the distinguished Director of our Division of Corporation Finance, worked on transactions that developed and then used an ECU, or European Currency Unit, and an EUA, or European Unit of Account, in deals creating a synthetic currency of the principal countries of the Common Market. A mere twenty years later, we pay for our European taxis and meals in Euros, a real European currency. The new economic and financial Europe has emerged in our lifetimes, before our eyes.

When I became the SEC's Chairman in August 2001, having the Commission play a leading role in the successful globalization of markets was among my highest priorities. Two of my earliest appointments to leading staff positions demonstrated that commitment. Our gifted Chief Accountant, Bob Herdman, was in charge of global professional practice at his prior firm. Alan Beller spent nearly a decade of his legal career practicing law in Paris and Tokyo. Bob and Alan bring more international experience to their vital positions than our agency has had at any time in its history.

You and we both know now that intervening events diverted attention from my global agenda. First, there was the tragedy of September 11th, which touched all of us. The tremendous outpouring of support and assistance from around the world helped our Country and our markets rebound with strength and determination. In some respects, all of us are still recovering; in other respects, we never will.

The crisis of terrorism was followed by a crisis of corporate collapses. A pattern of corporate greed and malfeasance was exposed. We witnessed breathtaking failures of corporate governance, revolting misfeasance by corporate leaders, and the complete abdication of responsibility by too many charged with providing checks and balances to the system - directors, audit committees, outside auditors, legal advisers, analysts, and others.

These scandals were years in the making. But, even before the scandals erupted, we knew we needed to improve the efficacy of our system of regulation. Last fall, we launched the most aggressive reform agenda in our history. The corporate scandals and collapses spurred us to accelerate and broaden our efforts. We recognized that the system of self-regulation of the accounting profession was broken beyond repair. We embarked on long-needed disclosure reforms to improve the quality and increase the timeliness of disclosure. We called on the New York Stock Exchange and Nasdaq to improve corporate accountability and corporate governance through strengthened listing standards. We initiated our unprecedented program of "real time enforcement," pursuing wrongdoing with a vengeance.

The President and Congress also responded forcefully. In March, the President announced his "Ten-Point Plan," embodying three core principles: accurate and accessible information, management accountability, and auditor independence. In April, the House of Representatives passed important legislation addressing oversight of the accounting profession and the weaknesses in corporate governance and disclosure.

The final product of these efforts was the Sarbanes-Oxley Act of 2002, which President Bush signed into law on July 30th. Its reforms are broad ranging, including provisions affecting the governance of the accounting profession, disclosures by public companies, corporate governance and enhanced criminal penalties for securities fraud. I am personally pleased that the ultimate legislation adopted the substance of many of our recommendations for solving these crises.

The new law was prompted by problems encountered in the U.S., but these problems are global in dimension. As a result, numerous other jurisdictions are considering regulatory reform, patterned after our own. Many EU countries and the European Commission are reexamining their existing oversight and governance systems, an effort we commend and support.

What is at stake for all of us is nothing less than capitalism itself. Over hundreds of years, our common economic system has proved its merit and endurance. We are all part of a global economy. We are all engaged in a linked pursuit of capitalism's wonderful goals. We are not, and must never be, adversaries. In matters of sound regulation, we cannot allow ourselves to be competitors.

At the SEC, we have a huge amount of work ahead of us to seize the opportunity to effect dramatic changes in the way our capital markets are regulated that is afforded by the Sarbanes-Oxley Act. In implementing Sarbanes-Oxley, we will be fully faithful to its letter and spirit, and we will also be fully mindful of the impact of regulation on both U.S. and global markets. We seek to usher in a new regulatory regime in concert with you, not impose our solutions on you.

One of our major tasks under the Act is creating a new Public Company Accounting Oversight Board to oversee the accounting profession and public company audits. The Board will operate as a non-governmental, nonprofit corporation and will consist of five full-time, independent members, two of whom must be certified public accountants. We must appoint the initial board by October 28, 2002, and it must be operational by April 26, 2003. Some in the U.S. seek to politicize this effort. They will fail.

After the Board is up and running, its first order of business will be to register all accountants that audit public companies. This registration process can take up to six months, over which time the principal focus will be on U.S. audit firms.

The Board also is charged with establishing standards and rules relating to auditing, quality control, ethics, and independence. The Board will set standards for auditor conduct and independence, discipline auditors if they err, and perform regular quality control reviews to make sure firms are functioning at the highest professional levels. The Board will complement our own enforcement efforts, and also focus on ethical and competence requirements. Our work with this private sector Board will be in the best tradition of cooperative oversight.

Of understandable concern to you is the fact that the Act requires foreign public accounting firms that audit SEC-registered issuers, including foreign private issuers, also to register with the Board and be subject to its oversight. Various jurisdictions, including the EU, have expressed concerns about the extraterritorial effects of the Act. These concerns deserve, and will receive, our careful consideration. But, these concerns must also be assessed against the recognition, by regulators and other public officials outside the U.S. "that many of the U.S. reforms have potential value" here in Europe, should be examined and evaluated, and should be adopted and adapted if they can benefit investors here and everywhere. The Commission's Chief Accountant, Bob Herdman, has stated that he views this as an opportunity for all jurisdictions to evaluate their processes of auditor oversight and strengthen them where necessary, and to work together to do so.

Once the Board is operational, it will need to determine a plan to consider and address issues regarding foreign firms. The Act provides that we, or the Board subject to our approval, may exempt any foreign public accounting firm from any provision of the Act or the rules promulgated under the Act. Once the Board is operational, we and it will explore the basis and need for exempting foreign audit firms. Ultimately, our decision must balance the fundamental regulatory objectives of Sarbanes-Oxley with our role as one of many regulators in the community of nations. We want to work closely with you in making these determinations and we will give real credence to the auditor oversight approaches other nations take.

Capital flows to opportunity everywhere, and information - particularly financial information - is the critical currency for investors seeking returns and for companies seeking capital to grow. Because financial information is primarily driven by accounting standards, the U.S. has a keen interest in changes that are occurring in the accounting standards that are issued by the International Accounting Standards Board, in addition to the accounting standards that are developed by our own Financial Accounting Standards Board. As the two accounting standards boards address important financial reporting matters, we have encouraged them to work toward convergence. When transparency and high quality information can be provided by common approaches on accounting issues, investors everywhere will benefit. I am pleased that the FASB formally added convergence work to its agenda when it met last week.

During the last 12 months, there have been tremendous changes in the EU's financial reporting infrastructure. Perhaps the most significant of these is the requirement that, by 2005, International Accounting Standards must be used as the official accounting standard for almost 7000 EU listed companies.

The conversion of most European public companies to international accounting standards by January 1, 2005 has set in motion a number of other actions in Europe to encourage consistent and transparent financial reporting. There are underway efforts to introduce minimum standards for audit quality assurance and to strengthen auditor independence. I understand that the Committee of European Securities Regulators is preparing to issue a Draft Statement of Principles on Enforcement.

Having most European issuers use a single set of accounting standards by 2005 provides an interesting target date for us as we reform our financial disclosure and auditing processes. If, by 2005, there has been sufficient progress in the improvement and short-term convergence of accounting standards, in the development of a process and structure for consistent interpretation and application of IAS, and in the enhancement of financial reporting infrastructure, then it may be appropriate for us to reconsider the need for foreign private issuers from EU member countries to continue to reconcile from IAS to U.S. GAAP.

The desire for convergence of accounting standards is greater than ever. For us, convergence aspires to, ultimately, all standard setters agreeing on a single set of high quality accounting standards applied even-handedly. This will greatly reduce uncertainty about comparability of published accounts, and greatly enhance the transparency of information to the market place. As the world's standard setters work toward this ultimate goal, it is important that they reduce differences along the way, in short-term as well as long-term projects.

Our FASB and the IASB are committed to working together to produce high-quality accounting standards across the major international capital markets. They recently have announced the desire to undertake an historic and very important joint project aimed at eliminating the key differences between existing U.S. generally accepted accounting principles and international accounting standards. The staffs of both Boards, together with our staff, have been working together on the scope of this project. We have encouraged both the FASB and IASB to develop reasonable and pragmatic short-term solutions to eliminate as many accounting principle differences as possible.

Once we achieve consistent standards, we must also achieve a level of consistent interpretation, application and enforcement. Critical elements that need to be considered to attain consistent interpretation and application of IAS - indeed of any accounting standards - are ethical preparers of financial statements who are both competent and motivated to provide transparent financial reporting, independent audit firms with effective quality controls, and active regulatory oversight.

As international accounting standards become used more widely in the EU and elsewhere, our joint challenge will be to achieve consistent interpretation, application and enforcement. IAS will be applied by professionals in at least 15 different countries. The difficulty of this task will be compounded by the fact that most of IAS is a set of high-level standards based on very general principles. Concerted action will be needed to address the potential for differing interpretations that can arise when the standards are applied by professionals within and among audit firms, especially in an environment of extensive and immediate change from practices these professionals have previously followed. I do not advocate that the IASB abandon its principles-based approach. Principles-based standards are desirable, and we expect to see U.S. standards move in this direction. I do suggest that principles-based standards must be accompanied by some examples and illustrations and sufficient application guidance, which can and should be principles-based as well, in order to enable consistent interpretation and application.

All of us want to avoid the emergence of multiple interpretations of IAS for identical transactions. While there does not necessarily need to be only one interpretation with a principle-based standard, there cannot be fifteen. This would undercut the benefits of moving toward a single set of high quality international accounting standards.

Creating a mechanism within the EU to ensure consistent interpretation of international standards is extremely important. I am encouraged that these issues are expected to be brought to the International Financial Reporting Interpretations Committee or IFRIC for consideration. While I believe IFRIC will be an important element of the infrastructure, the audit firms and European regulators must also play a key role in creating an environment where consistent interpretation and application can flourish.

Let me also add a word about insulating the integrity of IASB standards. Implicit in our ability to accept IAS is the concept of fixed funding for the IASB, and the commitment of the EU to accept and defer to IASB pronouncements, even when doing so raises political hackles.

To summarize, the elements of an effective financial reporting infrastructure include:

effective, independent and high quality accounting and auditing standard setters;

high quality accounting and auditing standards;

audit firms with effective quality controls worldwide;

profession-wide quality assurance; and

active regulatory oversight.

This is what we are working toward under Sarbanes-Oxley. These are also the elements of an effective global financial reporting infrastructure. And that is what we want to work toward with you.

Foreign Access

With advances in technology and communication, securities markets have become increasingly global, and I'm well aware of the desire of non-U.S. exchanges to access U.S. investors on more liberal terms. Currently, foreign exchanges seeking to operate in the U.S. are subject to the same standards as U.S. exchanges: both the exchanges themselves and the securities traded on them must be registered with the Commission, absent compliance with an available exemption. Full compliance with the U.S. registration requirements, however, raises difficult business issues for foreign exchanges and the issuers of securities traded on them.

Earlier this year, I directed our staff to develop a balanced proposal to address the foreign market access issue. Our staff recently completed its work, and I will soon schedule a time for the Commission to evaluate this proposal. I believe any proposed relief should focus on foreign exchanges that limit their U.S. activities to offering foreign securities to sophisticated U.S. investors.

Our primary goals are protecting investors and market integrity, while encouraging competition and a level playing field. Our regulations are designed to achieve these goals regardless of the laws applicable in the country of the market participant. By ensuring that each market participant acts in a manner consistent with these goals rather than judging the regulatory system in the participants' home countries, the SEC allows the largest possible number of qualified market participants to have access to U.S. markets. In considering requests for exemptive relief, reciprocity is critical - we must take into account any contrary regulatory approach that leaves U.S. market participants at a disadvantage to their foreign counterparts.

In that context, I'd like to say a few words about the Proposed Directive on the consolidated supervision of financial conglomerates which, as you know, would establish minimum requirements for group-wide supervision of "financial conglomerates" and "mixed financial holding companies" doing business in the EU. The Proposed Directive has the noble intent of facilitating more effective prudential oversight of cross-sector groups. But, questions surrounding its potential extraterritorial impact have generated considerable concern at the SEC and among U.S. securities firms. If, for example, EU authorities charged with making "equivalence" determinations take the position that the SEC's supervision of securities firms at the holding company level is not equivalent to the EC's standards, the likely result would be to increase the cost to U.S. firms of doing business in Europe, and place them at a competitive disadvantage with European-based firms.

At a time when we are carefully evaluating the impact of U.S. rules and regulations on foreign entities, in an attempt to move to more global markets, the EC would do well to ward against the possible extraterritorial imposition of standards on U.S. firms by the EC in the form of "equivalence" determinations. To the extent that "equivalence" signals an effort to move towards an approach based on reciprocity, I welcome the effort. But to the extent "equivalence" is really a thinly-veiled means of having a "co-ordinator" in the EU evaluate the quality of the U.S. regulatory regime, that approach will be counter-productive and will not enhance investor protection. Our staff has been discussing the issue of equivalence and reciprocity with EC representatives, and how our respective approaches can best address the need for group-wide supervision of financial conglomerates in today's global markets. We are optimistic those discussions will be productive, and I look forward to continuing this dialogue, with the goal of reaching a prompt, sensible and mutually satisfactory outcome.

Disclosure and Corporate Governance

As we continue our reform of our disclosure and auditing processes, we need to consider how any changes we make will affect foreign as well as domestic issuers and investors. Sarbanes-Oxley generally makes no distinction between U.S. and foreign private issuers listed in the United States. It applies equally to all who seek to access U.S. capital markets. We are committed to implement the Act in a manner fully consistent with its purpose and intent.

Some have called on us to exercise our broad exemptive authority to obviate the impact of Sarbanes-Oxley on foreign issuers. We have general exemptive authority under the statutes that we administer. We have used it wisely to permit sensible regulation under, for example, the Securities Exchange Act of 1934, to take account of changes in markets, technology, and other factors over the 68 years since that Act was adopted. No one should believe, however, that, as a pragmatic matter, similar latitude exists to use exemptive authority broadly in the case of legislation that was enacted with unmistakable clarity of purpose about 68 days ago.

Our mandate is to implement the Sarbanes-Oxley Act fully for all companies, foreign and domestic. Foreign companies therefore can expect that many of our new rules will apply to them. But we are prepared to consider how we can fulfill the mandate of the Act through our rulemaking and interpretive authority in ways that accommodate the home country requirements and regulatory approaches of the home jurisdiction of our foreign registrants and potential registrants. As we proceed with implementing the Act, we will therefore also seek a better understanding of any conflicts that may exist, as well as their potential resolution.

If a foreign company considered a U.S. listing before Sarbanes-Oxley, neither the Sarbanes-Oxley Act nor our rules implementing the Act should dissuade the company from going ahead now. Yes, there will be new disclosure and other requirements, but the SEC as an institution, and I personally, desire to make it inviting for global business to offer and list their securities in our markets. I am confident that the U.S. markets will emerge stronger and with greater transparency and comparability among listed companies.

In the case of the scope and integrity of disclosure, I believe that Sarbanes-Oxley calls for us to continue our long-standing policy. Basic disclosure standards have been and will be generally the same for U.S. and foreign issuers that access our markets. I believe that this approach is commonly accepted as part of the international capital markets. Markets generally have been thought to act consistently with their legitimate interests when they impose disclosure standards in connection with listings or offerings in their markets. This philosophy extends to certification of disclosure or other procedures to ensure the integrity of disclosure.

In implementing Sarbanes-Oxley, we are mindful of the accommodations that we have made consistently to foreign private issuers in our disclosure regime. For example, we require that such issuers file annual reports but otherwise leave the timing of interim disclosures by these issuers to home country requirements. Our newly adopted rules regarding certification evidence a continuation of this philosophy.

There are a number of provisions of the Sarbanes-Oxley Act that go beyond disclosure. The Act introduces federal law and the Commission into a number of areas of corporate governance and internal corporate activity in ways that are new. Examples include requirements for an audit committee of independent directors for listed companies and prohibitions on loans extended or arranged by a company to its officers and directors.

The audit committee provisions in particular could have a potentially broad impact on internal corporate governance practices of reporting companies. For example, the Act includes provisions designed to strengthen the role of audit committees. By April 26, 2003, we must adopt rules directing U.S. markets to prohibit listing securities of any issuer not in compliance with new standards of audit committee responsibility and independence. Under these standards, an issuer's audit committee must be composed of independent directors and must be directly responsible for the appointment, compensation and oversight of the issuer's audit firm. The committee also must establish procedures for handling complaints regarding accounting or internal control matters of the issuer, including confidential methods for addressing concerns raised by employees. Many foreign jurisdictions do not require issuers to have audit committees, although some are studying their possible use. Also, some countries, such as Germany, require that employees, who would not be viewed as "independent" under the Act, serve on the supervisory board, whose responsibilities include audit oversight functions.

We are aware of the fact that requirements such as these can come into conflict with internal corporate structures and legal requirements in home jurisdictions of foreign private issuers. Some of the requirements for audit committees under Sarbanes-Oxley may go beyond or conflict with local requirements. More subtly, some of the abuses addressed by the Sarbanes-Oxley Act may be addressed in other jurisdictions in different ways from those required or mandated by the Act.

We have begun the process of dialogue with foreign issuers and regulators, and we will continue that effort. A very important part of our rulemaking processes involves the comment process. It is not only required by U.S. law, but also is a crucial element in allowing us to get our rules right. It is a public and transparent process that allows communication between our Commission and all interested parties. Foreign issuers have often been reluctant to participate in that process. In the case of the proposed rules implementing the Sarbanes-Oxley Act in particular, I urge foreign companies and their advisors to comment on our rule proposals and to let us know when our proposals conflict with local law or local stock exchange requirements, or where problems that proposals are intended to address are addressed in alternative ways in other jurisdictions. Our final rules may not always address your concerns, but we do promise to listen, and carefully evaluate them, and do our best to harmonize the application of our rules with foreign sovereign requirements.

All of us must consider changes in our markets in a global context. While we will not, and cannot, always share the same vision on every issue, there is much we can learn from one another, and much that requires us to work together. To facilitate that effort, I am considering providing an SEC presence here in Europe, so our dialogue can take place day in and day out, and we can truly work together and learn from one another. The cooperative spirit that has served us so well in the past must be our guiding principle as we marshal our collective resources to meet the challenges that lie ahead. Today, and here and now, we renew this spirit.